Studied by 3 people
Allocative efficiency
A state of the economy in which production is in accordance with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it
Lack of public goods
goods that are of benefit to society, the lack of public goods in a free market would be considered market failure
Public goods
A good or service that is characterized by non-rivalry and non-excludability; a good or service with these characteristics would not be provided in a free market (market failure) and are therefore provided by the government. eg flood barriers, national defense
Quasi public goods
public goods that could debatabely exist in a free market (e.g. street lighting, light house)
Non rivalrous
the consumption of the good by one person does not keep other people from also consuming that good.
Non excludable
impossible to exclude individuals from consumption
Government intervention with public goods
1. may provide the good themselves (use taxpayer money)
2. subsidize companies to produce good
Under Supply of Merit Goods
lack of consumption of a good that has a positive benefit to society = market failure
Merit goods
goods that would be under-provided in a free market economy (e.g. healthcare and edu, health facilities, the opera). goods the government thinks have benefits to society all public goods are merit goods
Government intervention with Merit Goods
1. depending on important government will attempt to increase supply and thus consumption, if the good is very important (edu and healthcare) the government may subsidize it completely/provide directly, if less important than subsidized left all subsidies paid by tax payer's anyways
Over supply of demerit goods
over consumption of goods with a negative effect on society = market failure
Demerit goods
goods that will be over-provided by the market and, because of this, will be over-consumed. goods that the government thinks are bad for both people and society, and thus will attempt to decrease consumption (e.g. smoking, alcohol, child pornography, junk food, hard drugs)
Externality
A cost or benefit of a good or service that is not included in the purchase price of that good or service (to a third party)
Marginal private benefit
The extra benefit or utility to the consumer of consuming an additional unit of output.
Marginal private cost
the cost of producing an additional unit of a good or service that the consumer of that good or service received.
Marginal social cost
The extra cost to society of producing an additional unit of output, including both the private cost and the external costs.
Marginal social benefit
The extra benefit or utility to society of consuming an additional unit of output
MPC
essentially the private supply curve that is based on the firms costs of production
MPB
essentially the private demand curve that is based on the utility or benefits to consumers
Negative Externality
A 'bad' cost imposed without compensation on third parties by the production or consumption of sellers or buyers. eg. effects of smoking on third party
Welfare loss
loss of economic welfare because of a decrease in producer or consumer surplus; occurs when a market is not in equilibrium
Negative Externality of Production (External Costs)
when the production of a good or service creates external costs that are damaging/harmful spill-overs to third parties (e.g. pollution from factories)
Government intervention for Negative Externality of Production
Tax the firm to shift supply line to desired allocative efficient quantity. if externality fixed = internalized (problems with taxing: hard to measure pollution, hard to place monetary value on pollution, tax no reduce pollution).
Government could legislate/ban (pass laws regulating output) problems: may lead to job loses and non consumption of valuable product, and may be expensive to police law
issue tradable emission permits
tradable emission permits
licenses to emit limited quantities of pollutants that can be bought and sold by polluters (AKA Cap and Trade)
cap and trade scheme
A scheme in which a government authority (of a single country or group of countries) sets a limit or 'cap' on the amount of pollutants that can be legally emitted by a firm, set by an amount of pollution permits distributed to firms; firms that want to pollute more than their permits allow can buy more permits in a market, while firms that want to pollute less can sell their excess permits.
carbon taxes
A tax on fossil fuels (especially coal and gasoline) based on their emissions of CO2 and other air pollutants.
Negative Externality of Consumption
when goods consumed create a harmful spillover effect to third parties (e.g. second hand smoke, pollution)
Gov Intervention with Negative Externalities of Consumption
Ban the good. Problem: most these goods addictive, and getting addicts to vote against may be hard to do)
Place partial ban instead (regulating where smoking is allowed)
Tax the good (shift supply line to meet allocative efficient quantity supplied) problem: if product is inelastic, tax will not reduce consumption (perk: great income for government), but it may deter non addicts, and if taxes are too high = emergence of black/foreign markets
provide edu/advertise against the good, problem: costly and may only effect in long run
Positive externalities
a benefit obtained without compensation by third parties from the production or consumption of sellers or buyers. Example: A beekeeper benefits when a neighboring farmer plants clover. An external benefit or a spillover benefit.
Potential welfare gain
gain in economic efficiency that could occur if production or consumption can be increased to the pareto optimal level of output (MSB = MSC)
Positive Externalities of Production (External Benefits)
when production of good or service creates external benefits that are good for third parties (e.g. employee training, ecotourism)
Positive Externality of Consumption
when the consumption of a good or service provides an external benefit to third parties (e.g. school, healthcare, use of deo)
Government Intervention Positive Externalities of Consumption + problems
Subsidise or provide completely. problem: very expensive, developing countries may not afford
advertise to increase consumption. problem: high cost and may be more effective long run than short run, must weigh out benefits
pass laws insisting on use. problem: infringement of civil liberties
Direct provision
(a governmental arrangement) government provides a public service directly
Sustainable development
Development that meets the needs of the present without compromising the ability of future generations to meet their own needs.
Tragedy of commons
states that individuals acting independently and rationally according to each's self-interest behave contrary to the best interests of the whole group by depleting some common resource
Sustainable Development Threats
MARKET Failure!
poverty
fossil fuels
green house gases
Private goods
Goods that are both excludable and rival in consumption, paid by consumer for own personal use
Market failure
when there is a misallocation of resources in the price mechanism - when resources are not allocated to the best interests of society
5 types of market failures:
Externalities
under-provision of public goods
Information gaps
Monopolies
Under and over supply of merit goods/demerit goods
Externalities (4 of them)
positive production
positive consumption
negative consumption
negative production
Allocative efficiency
A state of the economy in which production is in accordance with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it
Lack of public goods
goods that are of benefit to society, the lack of public goods in a free market would be considered market failure
Public goods
A good or service that is characterized by non-rivalry and non-excludability; a good or service with these characteristics would not be provided in a free market (market failure) and are therefore provided by the government. eg flood barriers, national defense
Quasi public goods
public goods that could debatabely exist in a free market (e.g. street lighting, light house)
Non excludable
impossible to exclude individuals from consumption
Under Supply of Merit Goods
lack of consumption of a good that has a positive benefit to society = market failure
Merit goods
goods that would be under-provided in a free market economy (e.g. healthcare and edu, health facilities, the opera). goods the government thinks have benefits to society all public goods are merit goods
Over supply of demerit goods
over consumption of goods with a negative effect on society = market failure
Demerit goods
goods that will be over-provided by the market and, because of this, will be over-consumed. goods that the government thinks are bad for both people and society, and thus will attempt to decrease consumption (e.g. smoking, alcohol, child pornography, junk food, hard drugs)
Government intervention with demerit goods
attempt to decrease consumption by:
1. if really important they will make illegal or ban (e.g. hard drugs and child pornography)
2. if less important they will tax it (cigarettes and alcohol)
Marginal private benefit
The extra benefit or utility to the consumer of consuming an additional unit of output.
Marginal private cost
the cost of producing an additional unit of a good or service that the consumer of that good or service received.
Marginal social cost
The extra cost to society of producing an additional unit of output, including both the private cost and the external costs.
Marginal social benefit
The extra benefit or utility to society of consuming an additional unit of output
MPC
essentially the private supply curve that is based on the firms costs of production
MPB
essentially the private demand curve that is based on the utility or benefits to consumers
Negative Externality
A 'bad' cost imposed without compensation on third parties by the production or consumption of sellers or buyers. eg. effects of smoking on third party
Welfare loss
loss of economic welfare because of a decrease in producer or consumer surplus; occurs when a market is not in equilibrium
Negative Externality of Production (External Costs)
when the production of a good or service creates external costs that are damaging/harmful spill-overs to third parties (e.g. pollution from factories)
Government intervention for Negative Externality of Production
Tax the firm to shift supply line to desired allocative efficient quantity. if externality fixed = internalized (problems with taxing: hard to measure pollution, hard to place monetary value on pollution, tax no reduce pollution)
Government could legislate/ban (pass laws regulating output) problems: may lead to job loses and non consumption of valuable product, and may be expensive to police law
issue tradable emission permits
tradable emission permits
licenses to emit limited quantities of pollutants that can be bought and sold by polluters (AKA Cap and Trade)
cap and trade scheme
A scheme in which a government authority (of a single country or group of countries) sets a limit or 'cap' on the amount of pollutants that can be legally emitted by a firm, set by an amount of pollution permits distributed to firms; firms that want to pollute more than their permits allow can buy more permits in a market, while firms that want to pollute less can sell their excess permits.
carbon taxes
A tax on fossil fuels (especially coal and gasoline) based on their emissions of CO2 and other air pollutants.
Negative Externality of Consumption
when goods consumed create a harmful spillover effect to third parties (e.g. second hand smoke, pollution)
Gov Intervention with Negative Externalities of Consumption
Ban the good. Problem: most these goods addictive, and getting addicts to vote against may be hard to do
Place partial ban instead (regulating where smoking is allowed)
Tax the good (shift supply line to meet allocative efficient quantity supplied) problem: if product is inelastic, tax will not reduce consumption (perk: great income for government), but it may deter non addicts, and if taxes are too high = emergence of black/foreign markets
provide edu/advertise against the good, problem: costly and may only effect in long run
Positive externalities
a benefit obtained without compensation by third parties from the production or consumption of sellers or buyers. Example: A beekeeper benefits when a neighboring farmer plants clover. An external benefit or a spillover benefit.
Potential welfare gain
gain in economic efficiency that could occur if production or consumption can be increased to the pareto optimal level of output (MSB = MSC)
Positive Externalities of Production (External Benefits)
when production of good or service creates external benefits that are good for third parties (e.g. employee training, ecotourism)
Government Intervention Positive Externalities of production + problems
Subsidise. problems: expensive and difficult to estimate value of subsidy needed, (subsidy = opportunity cost)
provide vocational training (in the case of employee training) problem: expensive and may not work, but great effect on PPC and economy
Positive Externality of Consumption
when the consumption of a good or service provides an external benefit to third parties (e.g. school, healthcare, use of deo)
Government Intervention Positive Externalities of Consumption
Subsidize or provide completely. problem: very expensive, developing countries no afford,
advertise to increase consumption. problem: high cost and may be more effective long run than short run, must weigh out benefits)
pass laws insisting on use. problem: infringement of civil liberties
Direct provision
(a governmental arrangement) government provides a public service directly
Sustainable development
Development that meets the needs of the present without compromising the ability of future generations to meet their own needs.
Sustainable Development Threats
MARKET Failure!
poverty
fossil fuels
green house gases
Private goods
Goods that are both excludable and rival in consumption, paid by consumer for own personal use
Note 
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